It's not surprising that a lot of people are thinking of refinancing with mortgage rates as low as they are. That got me wondering, though--in this world of tightened standards, how many of them can? For the answers, I turned to Tim Higgins, a home loan consultant with Patuxent Funding, a correspondent lender in Ellicott City.

Here's what he had to say last week about refinancing, buyer options and the housing market.


Q: Are standards continuing to toughen?

Underwriting guidelines have tightened. And then the extreme layer of bad news is property values. ... I have had probably 200 conversations in the last 60 days [about refinancing] and I have locked in one person at 4 ½ percent. One person. Now, I've locked in other people at higher rates, but I've locked in one person at 4 ½ percent. That's because that guy, he was borrowing $300,000, his home appraised at a million, he had an 800 credit score, his debt ratio is a 12, and he is what the banks consider a perfect risk. And therefore there's no additional overlays on his rate lock.

Q: Do you have to be perfect to avoid add-on fees?

Yeah, you do. ... Fannie Mae will severely penalize you if your credit score is less than a 720. ... We're in the middle of a refi boom, ... but unfortunately I spend 90 percent of my time telling people what I can't do. I get a lot of people who have an 800 credit score, who have a 12 percent debt ratio, who owe $300 [thousand], but when I call my appraiser, they tell me their home is only worth $330 whereas it was once worth $430. So they're not eligible. ... They don't have the 20 percent equity.

Q: What about the Obama administration's refinance plan for people with little or no equity?

I haven't done one of those yet. I'm told if it's a Freddie Mac loan, I can't--only the current servicer can do it. And I haven't even been given the rules yet for if it's a Fannie Mae loan. So the speculation is that there's going to be additional provisions that apply. …

All this is very confusing to the consumer. All the consumer hears is, interest rates are at 4 ½, and the government has just spent billions buying mortgage-backed securities and Treasury bonds to lower interest rates, so in their minds, they're thinking, "Great, interest rates are going to go to 4 percent." They're waiting. But interest rates aren't going to go to 4 percent. This is the bottom. ... It seems the government's plan wasn't so much to bring rates down to 4 percent as it was to cap rates at 5 percent. And to complicate things a little bit more, there's weird thresholds and loan limits. So you have Fannie Mae's old loan limit of $417,000: That's still the magic number. That's still the amount that's going to get you the 4 ½ to 5 percent interest rates. …

The biggest challenge is the low value. When I talk to some of my clients and I say, "What's your house worth," and they say $900 and the appraisal comes back $550, that's a pretty big disconnect. It's just one low appraisal after another.

I'm [also] getting purchase transaction appraisals that are coming in low. And that's strange, because we're in a declining market and the buyer is walking away saying, "I just got the greatest deal of a lifetime, I bought this house for $400 when the guy before me bought it for $700 two years ago," and the bank is saying, "That's great, but it's really worth $380."

So it's a mess. I'm still doing 10 to 20 deals a month, but I should be able to do 50 deals a month with these low rates. So it's very frustrating.

There's nobody that would not enjoy 4 ½ percent. There's nobody in America that would say no to that. But I can't help most of those people because they don't qualify, for whatever reason. Appraisal, credit score, loan size, debt ratio.

They can go FHA. ... You can put 3 ½ percent down. …

FHA went from two years ago representing 3 percent of the new loans in the country to now 30 percent of the new loans in the country. That's still a big avenue. … It doesn't make sense to do a conventional loan with less than 10 percent down, because then it starts to be pretty expensive and you might as well do an FHA loan.

Purchasers, ... they have the complete upper hand in the market right now. ... It's just that there's so much inventory for them to choose from. In the past, we would close purchasers in a weekend. And now these transactions, just to get them under contract, are taking six months. Because their decision-making process has been stretched out. Rates are stable, and they're low. There's a glut of homes to choose from and values continue to decline. There's no urgency for them to make a decision in a weekend. They have all the time in the world, and they take it.

But refinances, that's where it becomes frustrating. Because there's so many people out there that would like to take advantage of today's low rates and reposition their money on a 30-year fixed at 5 percent or better, and I just have to tell them they can't.

Q: What can they get? Five-and-a-half or 6 percent?

That does happen a lot. If they're already at 6 percent or 6 ½, it doesn't make as much sense to them. But the main reason people can't refinance, the number one reason, is because they don't have the 20 percent equity position.

Q: Twenty percent is absolutely required?

You could have a 10 percent equity position to refinance, ... but then as a lender I'm required to attach mortgage insurance to your loan. That's $300 on your mortgage payment. Just to take you from 6.5 to 5 [percent], ... the savings you're going to see is probably close to $300, so it's not going to benefit you in any way. People want two things, two things and two things only: They want a 30-year fixed ... and they want payment relief.

Q: Do would-be refinancers already have a 30-year fixed-rate mortgage, or are they trying to get out of a more exotic loan product?

It's a combination of both.

It's the millions and millions of people who bought in the last five years that are desperately trying to reposition their money, and it's impossible. It's just impossible. ... I was praying that Obama's plan would somehow say, "Anybody who wants to reposition their existing mortgage debt on their house, as long as they qualify with a pay stub, a credit score and whatever asset requirements are needed for normal value approval, we'll forgive home value for a minute." Let's just let people reposition their current mortgage debt at a fair rate, whatever it may be. … I know the banks would balk at the under-equity position, but it just seems like a simple solution to me.

The government's throwing trillions and trillions of dollars into all these different avenues of bailout, and the Fannie Mae refi thing is a good idea, but it doesn't help as many people as it seemed it would.

Q: If you're not going with an FHA loan, what credit score do you need?

You can do a loan with 620, but you're going to get trampled with add-ons.


Q: What interest rate would you qualify for in that situation?


You are looking at 5.75 and you're still going to have to pay 2 points. Basically, you're not going to be able to avoid paying points with a 620 credit score. So you're three-quarters of a percent above the market and you're still paying points as well. … [One point] is 1 percent of the loan amount.

Q: What's the going rate today for an 800 credit score?

You're really at 5 percent today.

Q: How many points should people expect to pay with a credit score below 720?

It's three-quarters of a point if you're below 720. But then it starts to incrementally increase. 700's the next level, and then 680 and then 660 and then 640.

Q: Do you see a light at the end of the tunnel?

I think that when we get to the point where you can put down a 20 percent down payment on a house and your payment would be the same payment if you rented that property, then housing will have to turn. Because if I can rent for $1,500 or my parents can give me $60,000 and I can buy and have a $1,500 mortgage payment, I think my parents are going to be much more inclined to lend me the $60,000 to buy a house. .. But we're not there yet. I think we're still heavily overvalued.

Q: The whole area or Howard County specifically?

I think it's more true in Howard County. Baltimore City's still pretty fair. You can buy a ... little condo or rowhome in Baltimore City and have a payment that's $1,700.

Prices are coming down, don't get me wrong, but I just don't think they're where they should be. The townhouse I bought in 2001 for $196,000, there's homes on the market on the same street for $375,000. Which is crazy. As a country I think we've come down to 2003 levels, but I really think we need to be down to 2001. They say all bubbles bottom where they started, right? ... So until we get back there, I think we're going to keep on going.